When Apartment Rents Climb, Landlords Can Say ‘The Computer Did It’

Shea Properties runs the Madrid Apartments in Mission Viejo, Calif., and sets rents by using revenue management software.Credit
David Ahntholz for The New York Times

The lease renewal notices that landlords send out annually have contained little good news for renters in recent years: Rents are up and vacancies down around the country. And having resigned themselves to paying more, renters may wonder whether the new number on their lease was plucked out of thin air.

Rest assured, it was not.

For about a decade the country’s biggest landlords, who together control about a million rental apartments, have been using powerful software tools to set rental rates on new and renewing leases. Patterned after the technology used to price airline tickets and hotel rooms, the software weighs competitors’ rental rates, market conditions, seasonal trends and hundreds of other variables to recommend the highest feasible rent for each apartment at a given time.

The technology can benefit residents as well. Just as travelers can lower their airline fare by flying at off times, residents can often lock in lower monthly rents by agreeing to lease terms that help apartment owners avoid downtime or fill less popular units. Revenue management software can generate options for renters by varying rental rates, start dates and numbers of months on the lease — and still hit a landlord’s revenue target.

Now landlords with as few as 3,000 units are testing the technology, which is chiefly produced by two companies, the Rainmaker Group of Alpharetta, Ga., which sells a program called Rainmaker LRO (for lease rent options); and RealPage Inc., of Carrollton, Tex., which calls its version YieldStar Price Optimizer. Both products incorporate data collected automatically from competitors along with masses of market and property information. YieldStar adds data from RealPage’s market researcher, MPF Research.

David Romano, the vice president of pricing and revenue management at Equity Residential, one of the largest publicly traded apartment owners in the United States, uses Rainmaker LRO at more than 100,000 apartment units in 15 states and the District of Columbia. There are exceptions, including complexes where subsidies impose rent parameters, and at rent-controlled properties in New York. The overall portfolio includes 8,290 units in the New York metro area, with 4,057 of those in New York City, Equity Residential said.

“It’s the combination of rent and occupancy which produces revenue, so we’re maximizing that optimum mix,” said Mr. Romano, who joined Equity Residential in 2004 to set up and run the centralized pricing system. “We don’t have occupancy targets per se. We let the system determine at what rate revenue is maximized at a given occupancy level.”

Landlords pay for an initial setup as well as a monthly subscription fee based on the number of units at each property. Neither software company would disclose rates, but clients said the costs were small relative to property budgets and potential income to be gained.

“You’re talking about $2 per unit, per month,” said Steve Gilmore, a senior vice president of Shea Properties in Aliso Viejo, Calif., a diversified real estate company that uses YieldStar Price Optimizer at all of its 14 apartment properties and 6,000 units. Mr. Gilmore said the software paid for itself in about six months.

Shea Properties had eschewed one-month leases, for example, before YieldStar began suggesting pricing options that made short-term deals worthwhile. At the Madrid Apartments in Mission Viejo, Calif., the company recently rented out a $1,200-a-month unit on a one-month lease for $3,000, a sum Mr. Gilmore says the company would not have thought to ask for before it began relying on revenue management software.

Revenue management is entrenched among apartment real estate investment trusts, or REITs, and has a growing following of smaller portfolio owners, said Steve Lefkovits, the president and chief executive of Joshua Tree Internet Media in Emeryville, Calif., which provides best-practice information to the multifamily industry.

“All of the public REITs except one use a revenue management software, and all of them use some type of revenue management strategy,” said Mr. Lefkovits, who in September co-hosted with the National Apartment Association an industrywide apartment revenue management conference in Arizona that drew 263 participants.

“The thing that was most interesting to me about this year’s conference,” Mr. Lefkovits said, “was the number of smaller owner-operators, with 3,000 to 10,000 units, that have invested the time and energy into adopting a revenue-management strategy.”

Greystar, a third-party apartment manager based in Charleston, S.C., has found that the apartment communities it prices with YieldStar Price Optimizer outperform the other properties in its portfolio by about 2.7 percent, said Tom Bumpass, the company’s chief information officer.

“We’ve seen it work,” Mr. Bumpass said, “and we’re encouraging others of our owners to move to this solution.” Greystar uses YieldStar at 182 complexes with a total of about 70,000 units, or a third of its management portfolio.

In initial testing, Equity Residential found it was able to raise revenue 3 to 5 percent at complexes using Rainmaker LRO, Mr. Romano said. That persuaded company leaders to buy the software for the entire portfolio.

Those results are fairly typical for operators that adopt revenue management, said Robert G. Cross, the chairman and chief executive of Revenue Analytics Inc. in Atlanta. “Across industries, you get a 3 percent to 7 percent increase in revenue and most of that goes to bottom line,” said Mr. Cross. “We’ve seen that in every industry we’ve been in, and the same is true for multifamily.”

Mr. Cross pioneered revenue management in the airline industry during the 1980s and 1990s before taking the concept to hotels and other sectors. In 1999, his company developed revenue management software for Archstone, owner of a large multifamily portfolio. Archstone later sold its rights to the software, which is now marketed and sold in updated form as LRO by Rainmaker.

Apart from raising revenue, executives at both software providers said such gains had a multiplier effect on property value.

A $2 million improvement in annual rent, for example, would add approximately $40 million to the sale price of a property trading at a 5 percent capitalization rate. A capitalization rate is an investor‘s expected return on the purchase price in the first year after a sale.

Multifamily landlords say the systems have proved particularly useful with lease renewals, because it takes emotion out of the process.

“Now it’s more about the analytics,” said Bryan Pierce, the revenue manager at Holland Residential in Vancouver, Wash., which uses Rainmaker LRO at 63 of its 70 properties. “Maybe this person is paying 15 percent below market, and as much as we love them, maybe it’s time to let them move on and capture that 15 percent.”

A version of this article appears in print on November 30, 2011, on page B6 of the New York edition with the headline: When Apartment Rents Climb, Landlords Can Say ‘The Computer Did It’. Order Reprints|Today's Paper|Subscribe